(AFP)--BEIJING — China's manufacturing activity hit a 14-month high in December, a further sign of a rebound in the world's number two economy as domestic demand improved despite external weakness, HSBC said on Friday.

The preliminary purchasing managers' index (PMI) released by the British banking giant hit 50.9 this month, up from a final 50.5 in November, when the figure returned to growth after 12 consecutive months of contraction.

A reading above 50 indicates expansion in the key sector, while one below signals contraction.

The index, compiled by information services provider Markit and released by HSBC, tracks manufacturing activity and is a closely watched barometer of the health of the economy.

The December reading is the highest since October last year, when the figure was 51, according to HSBC data.

China's economic growth hit a more than three-year low of 7.4 percent in the three months to September, but recent data reflecting domestic conditions including industrial output and retail sales has fuelled optimism that the worst is over.

But exports in November, which rose just 2.9 percent year-on-year to $179.4 billion, came in much lower than market expectations, fanning concerns on the sustainability of the recovery.

"However, the drop of new export orders and the downside surprise of November exports growth suggest the persisting external headwinds," he added, saying Beijing was expected to keep policy loose to offset such impacts.

Authorities have cut interest rates twice this year and have also reduced the amount of funds banks must keep in reserve three times since last December to encourage lending.

The country's top leadership is expected to hold a key annual meeting on Saturday and Sunday that will lay out major economic policies and goals for the next year, Chinese media reported earlier this week.

The preliminary PMI is based on approximately 85-90 percent of total PMI survey responses each month, HSBC said, adding that the month's final reading will be released on December 31.

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